Look out. Rather, look ahead to 2023 tax bracket changes. Because looking ahead is the best way to prepare a solid tax strategy. Ask anyone who has ever been behind on taxes or any other crucial task.
Getting ahead of the game is key.
That’s why we’re looking at the 2023 tax brackets now. Long before you will file 2023’s taxes in 2024. We want to arm you with information to prepare now.
So here are 14 things you need to know about tax changes on the way in 2023.
1. Most of the tax changes are due to inflation. You may have seen a headline or two about the “I Word.” The process the IRS uses to calculate inflation is complex and questionable to many. And since we can’t change how the government calculates these matters, we will move on.
2. The highest 2023 tax bracket is still 37%. In 2022, income (unmarried filers) over $539,900 ($647,850 for married couples filing jointly) was taxed at 37%. For 2023, those numbers go up to $578,125 ($693,750 for married couples filing jointly). That jump could keep some people from having to pay the highest tax possible.
3. There’s a significant difference in the income limits for the highest tax bracket and the next highest bracket of 35%. In 2023, the limit will be $231,250 ($462,500 for married couples filing jointly). Individuals would have to more than double their income to go from the 35% club to the 37% club.
4. The lowest 2023 tax bracket will remain at 10% in 2023 for incomes of $11,000 or less ($22,000 for married couples filing jointly). The limits in 2022 were lower → $10,275 or less ($20,550 for married couples filing jointly).
5. Info on long-term care changes for 2023. For the Qualified Long-Term Care Insurance Contract or Life Insurance Contract Per Diem Limitation, benefits move up to $420 a day ($390 in 2022).
6. $13,850 will be the new standard deduction for single filers in the 2023 tax year. $27,700 for married couples who file jointly. People use the standard deduction if they don’t have enough expenses to itemize deductions. *Also, the standard deduction is higher for those aged 65+ or people who are blind.
7. The standard deduction will be $20,800 for heads of household filers in tax year 2023, a $1,400 jump from 2022. Be sure you meet the various requirements to file as head of household. IRS rules are prickly.
8. The federal estate tax won’t kick in on an estate’s first $12.92 million in value. An increase of nearly $1 million from 2022 due to inflation. But if you live in one of these 17 states, you may still face state inheritance / estate taxes.
9. The earned income tax credit max for those with three or more children will rise to $7,430 in 2023. Many taxpayers don’t take advantage of the earned income tax credit. Self-employed people often believe they are ineligible. And those who see an unexpected dip in income may not know this tax credit exists if they’ve never used it.
10. The flip side: Expect tax collections to rise with inflation in 2023 as well. Forbes reported individual income tax collections rose 32% in 2022. ($1.8 trillion in 2021 to $2.4 trillion in 2022). With the IRS getting more funding, some expect a staggering 87,000 new IRS agents to be hired.
11. 2023 will see the opportunity to add $200 more into healthcare flexible spending accounts (FSAs). The limit is now $3,050. These tax-free spending plans can be used for a long list of medical costs. Even sunscreen, programs to stop smoking, and shoe inserts - but always check for changes in IRS allowances. Hair transplants? Afraid not.
12. Qualified Small Employer Health Reimbursement Arrangement: Program for businesses with 50 employees or less. Health costs reimbursed are tax-deductible by businesses and tax-free for employees. This program’s limits increase in 2023 to $5,850 for individuals. $11,800 with family coverage.
13. With changes to 2023 tax brackets, the alternative minimum tax (AMT) could affect high-earning taxpayers too. This tax is designed to close loopholes. Here are the new 2023 numbers to be aware of: Individuals earning $81,300. And $126,500 for joint filers. Married individuals filing separately $63,250. Estates / trusts $28,400.
14. For digital nomads or other Americans traveling long-term, take note of the foreign earned income exclusion before tackling your taxes. It could help prevent being double taxed (a decidedly bad thing). This exclusion will rise from $112,000 to $120,000 in the 2023 tax year.
Most of those inflated numbers will benefit Americans come tax time. Just remember that regardless of which of the above changes affect you, now is the time to prepare your 2023 tax strategy.
Waiting until 2024 to plan is a sure path to giving away your hard-earned money.
*Bonus: The gift tax exclusion will also be inflated from $16,000 to $17,000 in 2023. We covered this in our podcast about gift tax exclusions.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or strategies may be appropriate for you, consult your financial advisor prior to investing.
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